Uncle Sam Enlists Banks in Tax Battle

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The U.S. government predicts it could bring in nearly $9 billion in additional tax revenue over the next decade under a new law that requires foreign financial institutions to help snag tax cheats.

But don't expect international bankers to be too impressed. Not when they might, collectively, spend more than that to build the compliance and auditing programs they say would be necessary to identify unreported taxable holdings. According to both the U.S.-based Institute of International Bankers and the European Bankers Association, large global institutions might each incur expenses of $250 million or more to prepare for the Foreign Account Tax Compliance Act in the next two years, as they upgrade technology and familiarize employees worldwide with U.S. tax withholding policies.

"They're joking, 'Can we just write [the U.S. Treasury] a check and ask them to do away with this?" says Laurie Hatten-Boyd, a principal at KPMG in Washington.

Under the proposed enforcement guidelines set by Treasury and the Internal Revenue Service last fall, foreign banks have little choice but to comply with FATCA when it goes into effect in January 2013. Those that fail to report the offshore holdings of U.S. nationals to the IRS would face onerous consequences: a 30 percent withholding penalty on payments they receive from U.S.-based financial firms.

An alternative would be to pull out of all U.S. investments-a nearly unthinkable option for global institutions dependent on access to U.S. capital markets.

The cost of complying is only one of the complaints coming from across Canada, the Caribbean, Europe and Asia. More than 30 banks, trade associations and government officials from other countries have argued they may have no practical or legal access to information FATCA would have them collect. Some also complain that FATCA would require banks in countries such as Japan and Canada to duplicate the tax reporting already happening under treaties with the U.S.

"We are definitely supportive of the overall objective, which is basically trying to identify people who don't pay their fair share of tax in the U.S.," says Peter van Dijk, a senior vice president in Toronto-based TD Bank Group's taxation unit. "Our objection is we don't believe there is necessarily a big reason for building a brand new system."

U.S. banks have obligations under the new law as well. They must verify whether a foreign financial institution is FATCA compliant so they can enforce the 30 percent withholding provision when needed.

The Treasury and IRS expect to finalize the regulations in the summer, after considering industry suggestions that could settle many of the concerns of foreign institutions. Among the ideas put forth are limiting scrutiny to new accounts; exempting certain types of investments with lower risk of tax evasion activity; and letting banks comply with FATCA by using data already on hand from current anti-money laundering and know-your-customer regulations.

"There still continues to be a lot of lobbying," says Denise Hintzke, a director of the financial services tax practice at Deloitte. "We still see organizations sending in letters to try to influence Treasury in the drafting of the regs."

FATCA became an Obama administration priority following the U.S. Justice Department's hard-line negotiations with the Swiss financial giant UBS in 2009 to obtain the names of thousands of alleged tax evaders. That put a spotlight on the extent of unpaid taxes from offshore accounts and led to a Democratic push to add FATCA to the jobs stimulus bill signed into law last March. "This bill offers foreign banks a simple choice: If you wish to access our capital markets, you have to report on U.S. account holders," said Rep. Charles Rangel, D-N.Y., one of the sponsors of FATCA, in a statement released when the bill was passed. "I am confident that most banks will do the right thing and help to make bank secrecy practices a thing of the past."

Ellen Zimiles, managing director for Navigant Consulting and a former New York federal prosecutor of fraud and money- laundering crimes, says that Congress and Treasury have overstated the simplicity of the choice. Banks in some countries either have not maintained records that would point to nationality, citizenship or permanent resident status, or only have that information in paper records. "The financial institutions, in their onboarding, may not have previously asked all those questions in the way they need to for FATCA purposes," says Zimiles. "They may have some information, but I'm sure they have not asked if you're a U.S. green card holder."

Though anti-money laundering and know-your-customer procedures were introduced globally in the last two decades, they applied only to new accounts, says KPMG's Hatten-Boyd. "The Treasury and IRS thought [gathering data] was not going to be a big deal, because everybody's got AML and KYC documentation on file now," says Hatten-Boyd. "Well, it's not true."

Because of the lack of records, some large banks may have to vet tens of millions accounts around the globe, industry trade groups contend.

There was plenty for banks to be encouraged about in the Federal Deposit Insurance Corp.'s most recent Quarterly Banking Profile, which reported comprehensive industry earnings for the fourth quarter and all of 2014. Community bank lending is showing steady growth, capital levels keep rising and the FDIC's insurance reserves are stabilizing. But the numbers also contained worrisome signs. Here are key takeaways from the report.